Hong Kong Crypto Regulations
Just months after acknowledging that cryptocurrencies and related activities as initial coin offerings come with their fair share of risks and shall “intervene when appropriate”, the Hong Kong’s Securities and Futures Commission (SFC) are rolling out new rules for cryptocurrency funds and might extend the same to exchanges.
Hong Kong is an autonomous territory with strong connections with China. Although exchanges are banned from operating inside China as the government of the second largest economy seeks to protect investors and stamp out criminal activities, they are slowing warming up to crypto. Recently a Shenzhen Arbitration Court gave a directive classifying Bitcoin as a valuable commodity which users can pay for services with. On the contrary, Hong Kong is a blockchain hub and home to several high-volume digital exchanges as Binance, OKEx, and BitMEX. Their reputation will be sullied by this directive and would surely affect exchanges operating in the strategic location.
This move by the SFC has been in the making for a while now. In Sep 2017 they warned the public of the craze around initial coin offerings saying most are securities and owners would need to register with the country’s tax man. Their reiterated their position early this year but expanded their warning to include exchanges saying investors should do their due diligence before investing in blockchain projects. The SFC promised to police crypto exchanges and ICOs asking the professionals to play their role well by ensuring here is legality around tokens and exchanges.
Julia Leung, the SFC’s Executive Director of Intermediaries said blockchain and ICO were technical and investment in blockchain projects required expertise of venture funds:
“[Because of] the highly technical content and opacity of some of these [blockchain] projects, it is hard for an average investor to pick winners, a job more suited for professional investors such as venture capital funds.”
Now it appears they are taking definitive steps on matters regulation and joining forces with other regulators pushing for supervision in a space that has seen unprecedented growth attracting all kinds of investors and rogue elements. According to the SFC, all funds who dedicate more than 10 percent of their portfolio to crypto assets will have to be licensed while all trading platforms offering services for professional traders will have to subscribe to a sandbox and test investor protective implementations as anti-money laundering and similar requirements.
While speaking at a Hong Kong Fintech forum on Thursday, Ashley Alder of the SFC said blockchain is still at a nascent state, evolving and to prevent market manipulation and investor abuse, oversight was imperative:
“The market for virtual assets is still very young and trading rules may not be transparent and fair. Outages are not uncommon as is market manipulation and abuse. And there are also, I am afraid, outright scandals and frauds.”
This move by the SFC was received well by lawyers. Urszula McCormack, a Hong Kong-based partner of King & Wood Mallesons told Bloomberg:
“Realistically there are two possible ways forward — regulate or ban — and it’s a smart move that Hong Kong has chosen to regulate.”
However, it should be noted that exchanges that give their clients any form financial incentive or trade futures or derivatives don’t qualify for this compliance test locking out some willing exchanges in the process.